Infrastructure: electricity sector remains beset by problems

June 18th 2014

Addressing
regular power cuts was high on the priority list for Jesse Chacón when
he took over the Ministry of Electricity in April 2013. Beyond an
immediate 100-day plan to bring new capacity on stream and cut usage
(which failed to meet targets on both fronts), he is seeking to double
Venezuela's current generating capacity by 2015. However, given the long
lead-time necessary for raising generation capacity, the difficulties
in attracting investment in the sector in the context of a difficult
operating environment and severe deficiencies in the distribution
network, there seems little prospect of an improvement in electricity
provision.

In 1998 when Hugo Chávez was elected president of Venezuela, the
country was one of the most electrified in Latin America. It still ranks
near the top, along with Chile and Costa Rica, with an official 95%
coverage. Venezuela also generates more electricity per capita than
anywhere else in the region, and its per capita consumption level is the
highest too. Owing to almost US$50bn invested in the latter half of the
20th century, it has some of the biggest thermal power stations in the
region, as well as several hydroelectric power stations (including the
giant Guri system), which supply over 60% of consumption, saving the
equivalent of 400,000 barrels/day of oil.

Nationalisation spells start of sector's problems

The grid and the hydroelectric schemes were already under state
control when Mr Chávez took office, although there were also a number of
quite efficient private power companies. However, in 2007 the
government nationalised the private companies and created a huge
state-run company called Corpoelec, combining over a dozen companies to
run all electricity generation and distribution. The result was
administrative chaos. Two years later an electricity emergency was
declared and rationing imposed. The government cited a severe drought
associated with the El Niño climatic phenomenon, which had reduced to a
minimum the water level in the Guri dam.

The lack of water was real enough, although Venezuela had suffered
more serious droughts in the past without electricity rationing. The
real reason for the crisis was a failure to maintain existing
infrastructure and invest to cope with future demand. Plans to expand
the supply of hydroelectric power by building new dams, for example, had
been put on hold when Mr Chávez came to power, on the basis that the
country was too dependent on this source of energy. However, as even the
government admitted, by the end of 2008, almost 80% of thermal power
stations were more than 20 years old, and 30% were partially out of
action owing to faulty equipment. With an installed capacity of over
9,000 mw, they were producing just 3,800 mw. The president himself
conceded that the government had failed to pay sufficient attention to
the impending crisis.

Major problems with distribution too

However, the lack of generating capacity is only part of the problem.
Venezuela generates its hydroelectricity in the south-eastern state of
Bolívar, site of the heavy industries (iron, steel, bauxite, aluminium),
developed in the 1970s in a bid to diversify the economy away from oil
and take advantage of cheap power, mineral deposits and a navigable
river (the Orinoco). These industries are big consumers of electricity,
but the rest of the power generated must be sent to the north and west
of the country, where most of the population lives. Without a
distribution grid capable of bearing the extra load, boosting power
generation in the south-east will not solve the problem, but the
distribution grid too is showing its age and suffering from a lack of
maintenance.

The government has not lacked the resources to invest in the industry
given high oil prices. Indeed, between 1999 and 2013 it spent an
estimated US$120bn on electricity infrastructure. A staggering US$74bn
of this was disbursed after the onset of the electricity emergency,
which officially lasted from December 2009 until November 2010. However,
sector experts have argued that the response to the crisis was
improvised, chaotic, inefficient and riddled with corruption.

Venezuela's failure to develop its gas industry has also meant that
power stations designed to run on gas have to be fuelled with diesel,
which reduces exports, boosts imports and damages the installations
themselves. This situation has been exacerbated by Colombia's recent
decision to suspend gas exports. The 200m cu ft/day that Venezuela is no
longer receiving was partly destined for thermal plants in the west of
the country, as well as to the petrochemical industry and domestic use.
Ironically, the lack of cooking gas means that many consumers turn to
electricity for cooking, increasing demand.

Huge subsidies ensure that consumption growth stays strong

As with petrol, Venezuelans pay the cheapest rates in the world.
However, as much as 40% of the electricity consumed is not even billed.
Many consumers hook up unofficial lines, resulting in a tangle of
overhead cables in poorer parts of the country's cities. Much that is
billed for, especially to government institutions, goes unpaid. Combined
with a freeze on tariffs, there is little incentive to conserve energy.
Although the government has distributed tens of millions of
energy-saving lightbulbs, Venezuela continues to outstrip its neighbours
in terms of per capita consumption. Aside from the high level of
electrification and the low prices, this also reflects the fact that
Venezuela is an exceptionally urbanised country with an economy based
largely on energy-intensive industries.

At the onset of the electricity crisis, shopping centres were
compelled to open later and reduce consumption (by measures such as
turning off some escalators), while consumers deemed to be using too
much power were charged a penalty fee. This turned Corpoelec into one of
the few companies in the world to demand that customers restrict their
consumption of its product. The heavy industries in Bolívar were forced
to reduce consumption by 40%, causing huge—and in some cases effectively
irreversible—damage to production lines.

Blackouts remain a concern

Since the creation of the electricity ministry in 2009, no less than
four ministers have held the post. The latest , Mr Chacón—appointed by
Mr Chávez's successor, Nicolás Maduro— announced a 100-day plan to
reduce power cuts by adding 1,000–mw capacity and reducing demand by the
same amount. Mr Chacón stated in May that the plan had succeeded in
reducing power cuts by 41%. However, the electricity workers' federation
said that routine maintenance was not being undertaken, partly because
of a lack of equipment and spare parts. Distribution, as opposed to
generation, has not been given the priority it deserves. In 2012 just
2.8% of investment spent went on distribution. Yet the biggest and most
damaging power cuts—sometimes affecting over a dozen states and lasting
hours—have been the result of an overloaded grid.

While around 27,000 mw of installed capacity exists, at any one time
there is barely enough of this available to meet peak demand of over
18,000 mw. Worse still, at peak times the safety limits of transmission
lines are being breached. The government claims that the resulting
blackouts are due to politically inspired "sabotage" or to the
activities of animals such as iguanas, opossums or vultures. Sabotage,
iguanas or government incompetence, the end result is that Venezuelans
can no longer count on a regular supply of electricity, and there is no
sign of this changing any time soon.